Why Tesla Motors Inc.'s Earnings Won't Matter One Bit On May 7

Why you should think twice before having Tesla as a long-term position in your portfolio

Tesla Motors Inc.(NASDAQ:TSLA) will be reporting earnings on May 7, but if you ask this Fool, it will not make much of a difference to the outcome of the stock. And the reason is simple: When your stock is at $200 a share and you miss or surprise by a penny here or there, it makes no difference. When your stock has a market cap of $25 billion, and you beat or miss revenue expectations by $50 million here or there, it makes absolutely no difference.

There are no known financial metrics that I am aware of that will make any difference when Tesla reports next week that can justify its current valuation.

What will make a difference? Appetite for speculation and nothing else. If the market decides to play the greater fool theory once more, then Tesla's stock will go up. If the market decides to come to grip with reality, then chances are that the stock will go down. And to tell you the truth, I can't even begin to guess what this market will do. It's one thing making an educated guess based on comparative fundamentals, and it's another trying to guess what the market will do when a stock is this richly valued.

While Tesla is by far the premium electric-car maker, it is not the only one. And as the electric-car segment heats up, Tesla will feel the temperature rise as time goes by. The electric-vehicle sector has become more mainstream due to massive investment over the past several years -- more and more car manufacturers are either planing on making, or are already making, electric vehicles.

As a result, investors might want to rethink the multiples they are paying for Tesla, given today's current valuation.

The problem I have is not with Tesla the company, but with Tesla the stock. And the problem is that it is ahead of itself -- the stock's price is way ahead of the fundamentals.

For comparison, consider that Daimler AG(NASDAQOTH:DDAIF) recorded a record profit of 8.7 billion euros ($12 billion), and sold a total of 2.35 million vehicles in 2013 (a new record), with record revenue of 118 billion euros ($163 billion). The company trades at a P/E of 11 and has a market cap of about $100 billion.

Tesla, on the other hand, has a market cap of $26 billion (and that's after its recent tumble), has no trailing multiple (because it does not have profits on a trailing-12-month basis) and a forward 12-month P/E of about 60.

The following table depicts analyst estimates for Tesla:

Source: Yahoo Finance

Yes, the company is growing fast, but please note that Tesla is predicted to post $3.65 billion in revenue for 2014 and $5.26 billion in 2015.

To put it in perspective, Daimler recorded $163 billion in sales with $12 billion in profits and is worth about $100 billion, while Tesla will probably post $3.65 billion in sales for all of 2014, with very low profits, and currently is worth about $25 billion. Daimler recorded 44 times the revenue of Tesla, and yet is only worth four times more.

Let me put that in another way: Shareholders who own Tesla are paying about $6.80 per dollar in Tesla sales, but Daimler shareholders are only paying $0.61 for each dollar in Daimler sales. Tesla has so much baked in the cake that current shareholders are fighting an uphill battle in the search for capital gains. And I think it's a battle they can't win.

And the reason why I think they can't win is because even as the company will be growing and producing profits over the years, the stock will probably be going nowhere. In other words, a lot of the future capital gains to be had by current shareholders are already baked into the stock. With the exception of short-term traders, I doubt long-term holders of the stock will make money at today's valuations.

The bottom line is that at current valuations, investors will probably be very hard pressed to make a decent return over the long term. And if for some reason the market changes its mind on what it wants to pay for Tesla, then investors might lose a lot more than they bargained for. On an apples to apples basis, as compared to companies like Daimler for example, Tesla'a stock can go down much more than most people imagine.

So if you are a Tesla shareholder, disregard the earnings report, because it will not make one bit of a difference as far as the long-term valuation of the company. At current valuations, Tesla seems to be more appropriate for short-term traders and swings traders than anything else.

Author

I focus mostly on technology stocks, but I also venture out to other sectors. Mostly focusing on valuations instead of what makes companies tick. My greatest challenge, finding stocks that can double in 12 months or less.
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